J. Crew, acquired by TPG Capital and Leonard Green &
Partners LP in 2011, may be valued that highly in a sale to the
Japanese retailer or in an initial public offering, according to
a person familiar with the matter. A sale at $5 billion would be
the largest on record for an apparel company and would imply a
revenue multiple more than three times the industry median
during the past decade, according to data compiled by Bloomberg.

While publicly traded retailers such as Michael Kors
Holdings Ltd. have reached higher valuations, J. Crew’s owners
may prefer to sell now at a fixed price for a more immediate
exit, Sky Harbor Capital Management LLC said. For Fast Retailing
Chief Executive Officer Tadashi Yanai, who has said he wants to
turn his company into the world’s biggest clothing purveyor, it
may be worth paying up to get a hold of the J. Crew brand and
its 451 stores, said Diamond Hill Capital Management Inc.

“They have good brands, they’re very well-known but that
would be a very large purchase price,” Scott Rostan, founder of
New York-based Training The Street, which teaches new hires at
investment banks how to structure mergers and acquisitions, said
in a phone interview. “If you get an offer you can’t refuse,
you’re probably going to take it.”

Higher Multiple

A $5 billion acquisition would be almost twice the price of
J. Crew’s buyout three years ago and would value the company at
2.1 times its $2.4 billion in estimated sales for the fiscal
year ended last month, according to data compiled by Bloomberg.
The price also implies a valuation of about 14 times its
adjusted earnings before interest, taxes, depreciation and
amortization in the same period, the data show.

The median revenue multiple for retail industry deals in
the last decade was 0.6, and the median Ebitda ratio was 8.5,
according to data compiled by Bloomberg.

“For a company that size, that’s a pretty high multiple,”
Trevor Kaufman, a Greenwich, Connecticut-based analyst at Sky
Harbor, said in a phone interview. “That would be a tremendous
deal” for TPG and Leonard Green, said Kaufman, whose firm
oversees about $8 billion, including J. Crew bonds.

Maximize Value

Selling to Fast Retailing would be more appealing to J.
Crew’s owners than betting it will get the same or higher price
in the public market, said Kaufman and Bill Zox of Columbus,
Ohio-based Diamond Hill. In an IPO, private-equity firms
typically continue to hold shares after the sale, making them
vulnerable to market swings as they wind down their stakes.

“You’d be more certain to maximize value in a strategic
acquisition than you would counting on perhaps an irrational
price in the public market,” Zox, whose firm oversees about $12
billion, including J. Crew bonds, said in a phone interview.

The talks with Fast Retailing are at an early stage and
other potential bidders have also expressed interest, according
to a person familiar with the matter, who asked not to be
identified discussing confidential information. Buyout firm
Advent International Corp. is also interested in J. Crew, two
other people said.

Keiji Furukawa, a spokesman for Yamaguchi, Japan-based Fast
Retailing, and Margot Fooshee of J. Crew declined to comment on
the talks. A representative for Fort Worth, Texas-based TPG
Capital declined to comment on whether the firm preferred a sale
or an IPO. A representative for Los Angeles-based Leonard Green
didn’t respond to a request for comment.

Shares of Fast Retailing climbed 3 percent to 36,975 yen
today.

U.S. Goals

Fast Retailing may consider $5 billion a fair price for J.
Crew, whose merchandise, real estate and e-commerce expertise
will help the Japanese company achieve its U.S. expansion goals,
Zox said.

The retailer is seeking to quadruple sales to 5 trillion
yen ($49 billion) by 2020, with 20 percent coming from the U.S.,
Chief Financial Officer Takeshi Okazaki said last week. In the
U.S., Fast Retailing operated 17 Uniqlo stores as of November
and plans to open more. The company also owns the Theory brand.
Yanai reiterated the goals today and said they were achievable
through organic growth.

The clothing company “needs something instant if it wishes
to come close to its target,” Ashma Kunde, an apparel analyst
at Euromonitor International, wrote in a report after the talks
were reported Feb. 28. A deal for J. Crew “would bring Fast
Retailing a big step closer to achieving its American dream. The
company could not have picked a more suitable target.”

J. Crew had a 0.7 percent share of the U.S. apparel market
in 2013, while Fast Retailing controlled less than 0.1 percent,
according to preliminary data compiled by Euromonitor. The
acquisition would vault Fast Retailing ahead of rivals Hennes &
Mauritz AB and Zara-owner Inditex SA in the U.S.

Deal Financing

Fast Retailing had 323.5 billion yen ($3.16 billion) in
cash and equivalents at the end of November. While Takahiro
Kazahaya of Deutsche Bank AG said the clothing company should be
able to finance a deal even at the highest estimated price,
Citigroup Inc. analyst Masataka Kunito said $5 billion is
“excessive.”

Absent a takeover, J. Crew could fetch a similar valuation
in an IPO, according to Josef Schuster, founder of IPOX Schuster
LLC. Recent public offerings of apparel retailers suggest J.
Crew would see strong investor demand for its shares, said
Schuster, whose Chicago-based research firm focuses on IPOs.

Retail IPOs

Michael Kors, the luxury-goods company founded by the
designer of the same name, has risen almost fivefold since going
public in December 2011. Burlington Stores Inc. has jumped 57
percent since its October offering.

“There seems to be good momentum for this kind of stock,”
Marino Marin, a managing director in MLV & Co.’s investment
banking group and a managing principal in the firm’s proprietary
investment arm, said in a phone interview. “An IPO would be
well-priced. It would be a good exit.”

There’s no guarantee the public markets will award J. Crew
the Ebitda multiple of about 14 implied by a $5 billion
pricetag. While H&M’s enterprise value is 17.5 times Ebitda, Gap
Inc. is valued at 7.3 times. Specialty apparel retailers with
market capitalizations of more than $1 billion have a median
Ebitda ratio of less than 9, according to data compiled by
Bloomberg.

With H&M, “to be blunt, they rock,” Rostan of Training
The Street said. J. Crew “could get there. The question is how
long would it take.”

A $5 billion sale to Fast Retailing would be “a bird in
the hand,” he said.